Thursday, October 11, 2007

The perils of envy

And since we are talking of taxes, nationally (Glenn Reynolds and Kevin Drum) and locally (Patrick McIlheran and Jay Bullock) has differed as to the progressivity of federal taxes. Drum put together a bar graph which showed that, when you put FICA and income taxes together, the percentage of income paid in taxes rises progressively as income increases and then flattens out. The bar graph looks like a little hill leading to a plateau. Jay liked it so much that he duplicated it on his blog.

The problem, of course, is that little hill of progressivity (including households with incomes up to 200,000) comprise over 95% of all households. One gets fairly close to the top federal income tax rate well before one becomes enormously wealthy. There are very few people in the right half of Drum's bar graph.

They do earn a lot of money and we could, I suppose, argue that the wealthy should pay even more but given that there are relatively few of them (and that their taxable income tends to dry up in response to tax increases), I am not sure that there is much relief there for the rest of us.

It is certainly true that FICA taxes reduce (although not eliminate) the progressivity of all federal taxes in the sense that they tend to even out the percentage of income paid in federal taxes because they (and the benefits that they finance) are phased out at a certain level of income. But this was by design. Social security has been sold (somewhat inaccurately) as a system of old age and disability insurance and not as welfare. If the point is to insure and benefits, although they do go up with income, are capped, why would we ask people to pay into the system beyond the point where the additional payments would have the potential of yielding additional benefits? (Actually, to some extent, we do, but you get the point.) FICA taxes aren't supposed to be progressive.

Reynolds' point was that there is something intrinsically dangerous about a system in which a large percentage of voters pay no income taxes. What possible reason would such voters have not to increase spending? Generally, we think it helps people to make wise decisions if they participate in the consequences of those decisions. That these folks do pay FICA taxes doesn't change his point. FICA taxes aren't supposed to be used to finance the general operations of government (although, tragically, they have been.)

The better argument for the left would seem to be not that taxes are insufficiently progressive but that the distribution of income is too skewed. In an ideal world, it would be flatter. But making it flatter would require a great deal of interference with the market and that seems to result in less and not more total income. Is it better to have a small share of a large pie or an equal share of a small one? Focusing exclusively on distribution issues ignores that question.


Anonymous said...

There is a cap on the FICA taxes paid. What may not be well known is that there is a skewing in the benefit amounts paid. Take two people, A and B, same age, both worked 40 years. Each year A made twice as much as B. A paid twice as much in FICA taxes as B.

When they retire A will not get anywhere near two times what B gets. A will get perhaps 25-50% more than B. See? Nice and "progressive". [by an SSA employee].

Other Side said...

So what. A's resources at retirement age will be substantially more than B's. I hardly think the pittance more B receives will come close to approaching what A will be able to live on. Nor should it.